Under the ‘target date fund’ approach, which is popular in the US but not widely used in Britain, members new to the scheme are placed into a fund that corresponds to their expected retirement date, for example, the 2030 fund.
Then, rather than switching a member’s savings from higher to lower risk assets at an individual level when investors near retirement, the switch occurs at the level of the fund.
In its Designing an Investment Approach discussion paper, Pada says target date funds can be “operationally cheaper, easier to communicate to members and more flexible than individualised lifestyling.”
The authority adds: “This approach also has the advantage of increasing the flexibility of asset allocation to reflect market conditions.”
Pada points out criticisms that lifestyling can be “too blunt an approach” which does not consider an individual’s circumstances and can be difficult to communicate to members.
The discussion paper reveals that the default fund for personal accounts will likely take a safety first approach as the majority of members are expected to have below average financial knowledge and be averse to risk.
Aegon head of pensions development Rachel Vahey says an overly cautious fund could significantly dent members’ retirement incomes.
She says: “The concern is that the economic crisis and the fact that fear of losing money is uppermost in people’s minds will lead Pada to design an ultra cautious default fund, with little potential for investment growth. If coupled with low contributions, this could have a profound impact on people’s retirement income.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “There is a risk that whatever is put together will be a lowest common denominator, anaemic, risk averse kind of proposition that does little more than produce cash plus type returns.”